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Lawmakers looking for lower tax rates but more revenues

SALT LAKE CITY — Lawmakers may have to figure out during the 2018 Legislature what to do with an extra $100 million or more pouring into state coffers as a result of the new federal income tax changes.

Or not.

The question of what the impact the $1.5 trillion tax cut just passed by Congress will have on state income tax collections is expected to be answered at least in part Monday, the start of the 45-day legislative session.

If it's a windfall, that means not only will there will be more money to spend, there will be enough to cut taxes, too. That's something leaders of the GOP-controlled Legislature already have expressed interest in doing.

But if there turns out to be little or no additional revenue, it'll be back to business as usual with lawmakers juggling an ever-growing list of budget requests. Because this is an election year for most lawmakers, there will still be a push to reduce taxes.

Legislative fiscal analysts had previously projected there could be an additional $75 million to $100 million in income tax revenues for the budget year that begins July 1, on top of the $4.45 billion already projected.

However, the nation's new tax law has turned out to be so complicated that the fiscal analysts, along with Gov. Gary Herbert's budget office and the Utah State Tax Commission, are scrambling to figure out the impact.

On Monday, they're expected to jointly announce there may be more money depending on how the IRS handles a hefty new tax break for small businesses and professionals who file individual rather than corporate income tax returns.

The 20 percent deduction could end up erasing some or even all of the revenue gain anticipated largely because of the effect of the elimination of federal personal exemptions worth about $4,000 each on the income reported on Utah tax forms.

The uncertainty surrounding the details of the federal tax changes backed by President Donald Trump and passed just before Christmas will likely loom over the discussions about state taxes throughout the session.

Lawmakers are already preparing bills to deal with the possibility the federal income tax changes will bring in more money to the state, including a proposal to simply reduce the state's 5 percent income tax rate enough to eliminate any extra revenue.

Another option is adjusting the state income tax form to "hold harmless" just those taxpayers who would see an increase in their Utah tax bill under the federal changes that eliminate personal deductions.

The bill is still being drafted, but the sponsor, Rep. Tim Quinn, R-Heber City, said he's been told it's families with children earning between $50,000 and $90,000 who may end up paying more in state income taxes.

Besides the impact of the federal tax changes, lawmakers are also feeling the pressure of the Our Schools Now ballot initiative to raise both sales and income taxes to bring in an additional $700 million annually for education.

Proposals to ease the effect of so-called "truth in taxation" laws on local property tax increases as valuations grow and freezing the state rate are being talk about, as is expanding the tax base to bring in more revenues even if rates can be reduced.

Potential tax cuts include dropping the income tax rate from the current 5 percent and making changes to the corporate taxes deductions, both aimed at keeping Utah competitive in the business world as other states make similar changes.

"While our community is thriving, our state's tax code is not set up to ensure that that will always be the case. Why? Because a modern economy is leaving Utah's tax code behind," a video from the Salt Lake Chamber warns. The video, shown recently at the Chamber's annual Utah Economic Outlook and Policy Summit, was followed by a group of legislative leaders talking mostly about cutting taxes in the coming session.

"The 101 in tax policy is broaden this base as wide as you possibly can and just lower that rate as low as you can. And that is probably your most responsible approach to tax policy," said House Speaker Greg Hughes, R-Draper.

Hughes said it's time for "an uncomfortable conversation" about taxing services such as health care to bolster shrinking sales tax collections, but added support has to come from the professionals and other providers who would be subject to the tax.

Other sources of additional revenues expected to come up this session are user fees for alternative fuel vehicles and even bicycles, as well as possibly a boost in the gas tax, to offset some $600 million in mostly sales taxes now going toward roads.

There is already a bill filed to remove the state's remaining 1.75 percent sales tax on food and raise the state's 4.7 percent sales tax rate to just under 5 percent to cover the cost.

"This is not a tax increase. This is just a tax shift," said Quinn, also the sponsor of HB148, calling the impact of the new sales tax rate "negligible" because it amounts to another $2.40 in taxes on a $1,000 nonfood purchase.

For low-income Utahns who spend as much as 35 percent of their earnings on food, however, no longer being charged sales taxes on those purchases would make a big difference, he said.

"To me, this is not about economics. It's about morals," Quinn said, acknowledging the bill may not go far.

"I think it'll be a tough sell, and that's to minimize it," he said. But Quinn said his proposal, which surfaced during interim, has taken last session's talk of restoring the sales tax on food off the table, which is "a moral victory, if nothing else."

A deal brokered by legislative leaders last session to restore the full state sales tax on food while dropping the state sales tax rate slightly fell apart after data showed it wouldn't have a significant impact on stabilizing the tax base.

This session, lawmakers and Gov. Gary Herbert are using terms like reform and modernization to describe efforts to adjust the state's tax structure to keep up with growth.

"It's just time for us to update," the governor said at the Chamber summit. "It's time to modernize."